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Not All Dollars Equal

In business, not all dollars are necessarily equal.

If you generate $1 in an industry with a much higher “multiples” than another (i.e. web-based companies versus textile), that dollar is obviously worth more. In another example, if a company has a lot of government contracts, then each dollar it generates from the private sector is usually worth more because it creates diversity in the company’s portfolio.

So, conventional wisdom would suggest that companies should always chase the higher-valued dollar. Not necessarily. Companies need to make sure that it is clear about which business it is in. Executives shouldn’t just chase higher-valued dollars at the risk of compromising its core competitive advantage. For example, Wal-Mart is now the largest company in the United States with 2010 sales of $405 billion. It’s slogan remains, “Save money, live better”. The company is clearly focused on getting its “core-value” dollar. It would be a big risk for a large government defence contractor to start chasing the consumer market, where it doesn’t have much expertise.

Nevertheless, if all things are equal, it is important for executive teams to assess the value of the dollar of its business when planning ahead. This definitely should be a consideration for smaller, aggressive growth companies. But don’t be blindly seduced by higher “multiples” dollar. It always has to make GOOD BUSINESS sense.

In short, consider the value of the dollar you are chasing as one part of the overall criteria — and invest wisely.